Design Within Reach Merger Never Happened, Lawsuit Claims

To many in the furniture industry, the 2014 merger of Herman Miller, the famed purveyor of midcentury classics like the Eames lounge chair, and Design Within Reach, the emporium for sleek modern furnishings, was a no-brainer.

But a little-noticed lawsuit brought by two longtime shareholders in Delaware contends that the $154 million merger of the two never happened at all.

The lead plaintiff, Andrew Franklin, who is president of UTR, an investment firm, called it “the most-botched merger in Delaware history.”

“We’ve been deprived of a ton of value,” he said in a telephone interview.

Battling deals in court is nothing new, but a claim that a merger never legally concluded more than a year after it closed is an unusual one.

Mr. Franklin and another shareholder, Charles Almond, are seeking unspecified damages, but their argument could, in theory, result in the court ordering that the merger be rescinded and DWR essentially carved out of the company. It is a long shot, but it would be a corporate do-over on a large scale.

Representatives for Herman Miller and the other defendants, the four men who made up Design Within Reach’s board, declined to comment.

In court filings, the defendants denied the allegations and contended that “the plaintiffs have suffered no damages.” They also argued that fixes were made under provisions in Delaware law that make the merger valid.

A spokesman for Mr. Franklin said: “The plaintiffs seek to be made whole, and receive the value that they have been improperly deprived. The court has a number of mechanisms to accomplish that.”

The shareholders’ lawsuit, currently in the discovery phase, may not succeed, but the legal battle threatens to mar a merger that has largely been seen as an important combination in the world of high-end furniture.

Ask any design-minded consumer or office manager to come up with the leading names in the business, and both Design Within Reach and Herman Miller — whose other wares include the Noguchi accent table and the omnipresent Aeron office chair — are likely to come up.

In seeking to buy Design Within Reach, Herman Miller gained a respected retail outlet that could better showcase its goods, at a time when Knoll, a top rival, was expanding its own retail footprint.

DWR, as design cognoscenti often call the store chain, also helps give Herman Miller entree into the homes of its clients and helped cement the furniture maker as, in its own words, “a premier lifestyle brand.” That is meant to help differentiate Herman Miller from its top rivals in the office furniture business, including Knoll and Steelcase.

The idea behind the merger was not to convert Design Within Reach solely into a seller of Herman Miller goods.

“What you won’t see is Herman Miller and DWR becoming synonymous with one other,” Brian C. Walker, Herman Miller’s chief executive, told his company’s investors in July 2014, after the Design Within Reach sale was announced. “They’re a marketplace. We sell stuff into that marketplace.”

Still, Herman Miller calculated that buying the high-end retailer would lay down a road map for the company to reach $300 million in annual profit — and, perhaps, $500 million down the line.

“When we studied the furniture marketplace, we realized pretty quickly that not only were they aligned with us in price point and design, our customers were very, very similar,” Mr. Walker said.

“Over all, we concluded that Design Within Reach would really help us accelerate our consumer growth.”

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An installment showing components of the Eames Lounge Chair and Ottoman at the Museum of Arts & Design in 2006.CreditNick Merrick, Hedrich Blessing/Herman Miller

But the lawsuit has argued that there was a fatal flaw.

At the heart of the suit, filed in December 2014 in the Delaware Court of Chancery, is the accusation that, because of a series of technical mistakes, Herman Miller’s agreement to buy Design Within Reach never took effect.

A series of moves by Design Within Reach’s directors, led by Glenn Krevlin, a hedge fund manager who bought control of the retailer in 2009, essentially sought to squeeze out minority shareholders, the lawsuit says. The capstone of that campaign proved to be the Herman Miller deal.

Mr. Franklin contends that DWR never successfully carried out a reverse split of its shares, ultimately meaning that Herman Miller never collected the roughly 90 percent of the retailer’s stock needed to carry out the takeover.

Underlying the lawsuit is an earlier decision in the Delaware Court of Chancery, when the court invalidated another company’s stock split because it did not follow the state’s corporate law.

“Once you don’t know the capital structure, what are these shares worth?” Mr. Franklin asked. “They didn’t do the split right.”

In February, shareholders received a notice from Design Within Reach acknowledging “defective corporate acts,” including the reverse stock split, but contending that it had remedied those mistakes under a provision of Delaware law.

Mr. Krevlin’s close involvement with Design Within Reach began in 2009, when the retailer, which had lost $24 million in 2008 during the financial crisis, began looking for investors. The company agreed that summer to accept a $15 million investment from Mr. Krevlin’s investment firm, which already owned 17 percent of DWR, that would essentially give Mr. Krevlin 91 percent of the retailer.

Mr. Franklin made an alternative proposal that, he contends in the lawsuit, would have diluted other shareholders less, but was rejected. Mr. Krevlin joined DWR’s board along with William Sweedler, another investor. But Mr. Franklin kept his shares in the retailer.

“The moment Krevlin wrestled control of the business away, he went dark,” Mr. Franklin said. “But I remained a shareholder for years and years, quietly.”

Several months later, the company de-registered with the Securities and Exchange Commission, ending public filings about its financial statements, though it still traded over the counter as a penny stock.

In August 2010, Design Within Reach sought to reduce its total authorized shares from 31.5 million to just 630,000.

But Mr. Franklin said that while Design Within Reach declared the reverse split effective on Aug. 9, 2010, it had not notified minority shareholders of the move, and Mr. Franklin contends that he did not receive a notice of the attempt until his lawsuit.

The suit accuses the defendants of withholding other information from Design Within Reach’s minority shareholders, including several issuances of new stock that re-raised the amount of the companies outstanding shares. Those lapses, Mr. Franklin argues, ran afoul of Delaware law.

In July 2014, Herman Miller struck its deal to buy Design Within Reach.

The agreement between the two said that DWR had 7.5 million authorized shares, with 6.6 million outstanding. The lawsuit contends that, because of failures to comply with Delaware law, Design Within Reach had 30 million shares outstanding.

By the time of the agreement in the summer of 2014, Design Within Reach had rebuilt its business. It had increased its earnings before interest, taxes, depreciation and amortization to $28 million, rebounding from the 2008 loss, executives said at a meeting for Herman Miller investors and analysts in July 2014.

In early 2010, the company hired John Edelman and John McPhee, executives from Edelman Leather, a supplier of leather for luxury upholstery, as its chief executive and chief operating officer.

During the 2014 meeting with Herman Miller investors, Mr. McPhee and Mr. Edelman recalled that they cut costs sharply while increasing sales efficiency, according to a transcript. The company consolidated its stores. Sales staff members were retrained. Signs were improved to better attract customers.

The two stayed on at Design Within Reach after the acquisition by Herman Miller and said they saw brighter prospects for the business.

“We believe we’re in the third inning of the game, and we believe there’s no better place to put ourselves and our investments than this project,” Mr. Edelman said at the time.